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Inventory Optimization in the U.S. Petroleum Industry: Empirical Analysis and Implications for Energy Emergency Policy

Author

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  • R. Glenn Hubbard

    (Center for Business and Government, Harvard University, Cambridge, Massachusetts 02138 and Department of Economics, Northwestern University, Evanston, Illinois 60201)

  • Robert J. Weiner

    (National Bureau of Economic Research, Cambridge, Massachusetts 02138, ICF, Inc., Washington, DC 20006 and Energy and Environmental Policy Center, Harvard University, Cambridge, Massachusetts 02138)

Abstract

Much of the rapid increases in the price of crude oil during two of the last three supply shocks has been attributed to increased private inventory demand stimulated by the expectation of speculative profits. Government intervention in any future disruption is likely to take the form of releases from the Strategic Petroleum Reserve (SPR). Given that the SPR accounts for but a small fraction of U.S. oil inventories, the reaction of the private sector is critical in evaluating its impact. We incorporate inventory behavior in a model of the world oil market, which is then linked to a short-run macroeconometric model of the U.S. economy. Our model simulations support the view that substantial inventory accumulation accompanies a supply disruption. In the debate over whether the SPR is potentially a potent or impotent resource in an emergency, we lean toward potency. Our model suggests that public releases will not be absorbed in private stockpiles; indeed, their dampening price effects will serve, albeit slightly, to discourage speculative stock build.

Suggested Citation

  • R. Glenn Hubbard & Robert J. Weiner, 1986. "Inventory Optimization in the U.S. Petroleum Industry: Empirical Analysis and Implications for Energy Emergency Policy," Management Science, INFORMS, vol. 32(7), pages 773-790, July.
    • Handle: RePEc:inm:ormnsc:v:32:y:1986:i:7:p:773-790
    DOI: 10.1287/mnsc.32.7.773
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    Cited by:

    1. Bai, Y. & Zhou, D.Q. & Zhou, P. & Zhang, L.B., 2012. "Optimal path for China's strategic petroleum reserve: A dynamic programming analysis," Energy Economics, Elsevier, vol. 34(4), pages 1058-1063.
    2. Zhang, Xiao-Bing & Qin, Ping & Chen, Xiaolan, 2017. "Strategic oil stockpiling for energy security: The case of China and India," Energy Economics, Elsevier, vol. 61(C), pages 253-260.
    3. Soohyeon Kim & Jungho Baek & Eunnyeong Heo, 2020. "Crude oil inventories: The two faces of Janus?," Empirical Economics, Springer, vol. 59(2), pages 1003-1018, August.
    4. Jiao, Jian-Ling & Han, Kuang-Yi & Wu, Gang & Li, Lan-Lan & Wei, Yi-Ming, 2014. "The effect of an SPR on the oil price in China: A system dynamics approach," Applied Energy, Elsevier, vol. 133(C), pages 363-373.

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